Consumer financial products are innovating faster than anyone can keep up with them.
Every week I hear about dozens of new websites, apps, online pawnshops, and initial public offerings. Most are clunky, scammy, a waste of time.
A few, however, are products I’d strongly consider using myself. They’re fairly priced and address a genuine need.
Here are two recently introduced products that didn’t set off my bogus meter. If you have a mortgage or a taxable investment account, give them a look.
Harvest your losses with Wealthfront
If you have a taxable investment account (that is, stocks or bonds held outside a retirement account or 529 college savings plan), you’re probably overpaying — unless you take advantage of tax-loss harvesting.
Tax-loss harvesting (TLH) is a complicated-sounding term for a simple concept: if you buy an investment and it loses value, you’re entitled to deduct the loss (up to $3,000 per year) from your income or capital gains for tax purposes.
The (totally legal) trick is that you can sell the investment and immediately buy a very similar (but not identical) one and it’s still considered a loss.
For example, say you put $10,000 in Vanguard’s Total Stock Market Index Fund (VTSMX) fund on January 1. Partway through the year, you notice that it’s been a bear market and the value has dropped to $9,000.
You sell the fund, put the $9,000 into Vanguard’s S&P 500 fund (VFINX), and claim a $1,000 loss.
If you’re in the 25% tax bracket, you’ve just reduced your taxes by $250 without substantially changing your portfolio. (You can later exchange back into the original fund, but the IRS requires you to wait a month.)
You’re really deferring taxes, not avoiding them completely, but the goal is typically to defer taxes until you’re in a lower tax bracket in retirement or to eventually donate the investment to charity, which is tax-free.
All reputable financial advisors understand TLH and watch for opportunities to harvest losses.
If investing isn’t your full-time job, however, TLH is a pain: you have to watch the market closely enough to spot a loss big enough to make it worth your while, you have to be careful not to run afoul of the IRS’s “wash sale” rules (buying the same thing you just sold), and it’s a never-ending game.
Can’t we just get a computer to do it for us?
Absolutely, says Wealthfront, which introduced automated TLH last week. It’s available at no extra charge for accounts of $100,000 and up; Wealthfront’s annual fee is 0.25% of assets over $25,000, so a $100,000 account would pay $188.
The software watches for TLH opportunities continuously, avoids wash sales, and sends you the proper paperwork at tax time.
Wealthfront (a Mint.com Ways to Invest partner) is an online portfolio management company that offers a simple portfolio of exchange-traded funds.
I like their product, but I’ve dinged them in the past for charging a fee for a service that is not fundamentally different from a cheaper target-date mutual fund.
If you have a large taxable account, however, that criticism is no longer valid: no target-date fund offers automated TLH and I think it’s worth what they’re charging.
Pay it down with MortgageNudge
The brainchild of Certified Financial Planner, Don St. Clair, MortgageNudge puts together a customized mortgage payoff schedule based on the idea that it’s easier to commit to saving more in the future than it is today.
You tell the website your current mortgage balance and monthly payment and then specify how much you want to be “nudged.”
If you enter a $25 nudge, for example, you’ll pay an extra $25/month this year, $50/month next year, and $75/month the year after that. If that proves to be too optimistic, or not optimistic enough, or you refinance, you can always go in and change the settings.
Every time you move the Nudge slider, you’ll see immediately how long it will take to pay off your mortgage. A small nudge can have a surprisingly large effect.
MortgageNudge is really just a specialized calculator; it has no relationship with your bank and doesn’t actually modify your mortgage in any way.
So why pay $30/year for it when you could easily do this yourself for free?
Because MortgageNudge sends email reminders and has an official-looking website. That makes prepayment feel more required than optional, which means you’re more likely to get it done.
On the other hand, if you want to roll your own prepayment solution, DinkyTown.net just came out with a new version of their great online financial calculators.
The price? Free.